Leidos Holdings, Inc.

Greetings. Welcome to Leidos' fourth quarter 2021 earnings call. At this time, all participants are in listening mode. The brief question and answer session will follow the formal presentation. If anyone today should require operator assistance during the conference, please press star zero from your telephone keypad. Please note this conference is being recorded. At this time, I'll turn the conference over to Stuart Davis with Investor Relations. Stuart, you may now begin.

Thank you, Rob, and good morning, everyone. I'd like to welcome you to our fourth quarter and full fiscal year 2021 earnings conference call. Joining me today are Roger Crone, our chairman and CEO, and Chris Cage, our chief financial officer. Today's call is being webcast on the investor relations portion of our website, where you'll also find the earnings release and supplemental financial presentation slides that we'll use during today's call. Turning to slide two of the presentation, Today's discussion contains forward-looking statements based on the environment as we currently see it, and as such, does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Finally, as shown on slide three, during the call, we'll discuss GAAP and non-GAAP financial measures, a reconciliation between the two is included in today's press release and presentation slides. With that, I'll turn the call over to Roger Crone, who'll begin on slide four.

Thank you, Stuart, and thank you all for joining us this morning. 2021 was a banner year for Leidos, with industry-leading organic revenue growth and expanded profitability. In addition, we enhanced our market presence during the year with strategic acquisitions and investments that added important technical capabilities. Despite the ongoing impact of COVID-19 and an extended continuing resolution, we are positioned to grow in 2022 bolstered by our scale, differentiated technical offerings, and dedicated workforce. In my remarks, I'll address four topics. Our financial results and outlook, capital allocation, business development, and people. Number one, our financial performance in the quarter was strong despite a challenging market. Revenues for the quarter were $3.49 billion, up 7% year over year. For the year ahead, revenues grew organically across all reportable segments and were up 12% in total compared to 2020. In 2021, our adjusted EBITDA margin of 11% represented the sixth consecutive year of margin expansion. And non-GAAP diluted EPS was up 14% to $6.62. We generated $210 million of cash flow from operations in the quarter and free cash flow of $177 million. For the year, that translates to $1.3 billion of cash flow from operations and $927 million in free cash flow. These results came despite well-documented headwinds, most notably a protracted continuing resolution which slowed both tasking on existing contracts and the award of new opportunities, a resurgence of the pandemic which lowered workforce productivity and limited our interactions with customers, and a national security community transitioning to new threats. I am proud of how well the team weathered these headwinds. In 2021 we achieved our guidance for all of our metrics, but the standout metric was cash, which came in well ahead of our expert expectations through close coordination with our customers and strong operational focus our asset light model. lean cost structure, and efficient collections process enabled us to generate strong cash flow that we can deploy to grow our business and drive value for our shareholders. Which brings me to number two, capital allocation. Over the fiscal year, capital employment was balanced with a mix of strategic acquisitions, debt pay down towards our target leverage ratio, an enhanced dividend, and share repurchases. In the fourth quarter, we made a strategic investment in Hawkeye 360 to build on our multi-decade heritage of serving national security space customers. Hawkeye 360 is driving innovative solutions around space-based radio frequency data and analytics, and we're confident this investment will enable us to better serve key customers who safeguard the United States and allied interests. On the opposite side of the ledger, we agreed to divest Aviation and Missile Solutions, LLC, a small CETA business within Dynetics. This divestiture allows us to focus on leading-edge and technologically advanced services, solutions, and products that are more in our sweet spot. In 2021, we put $270 million towards repurchasing our shares. Looking ahead, our Board of Directors authorized a new share repurchase program of up to 20 million shares, replacing the prior authorization. We only had 4.5 million shares remaining on our 20 million share authorization from 2018, and we thought it prudent to increase our buyback capability. Under the authorization, we can repurchase shares in the open market or through privately negotiated transactions, including accelerated share repurchase transactions. Based on the current valuation of our stock, our financial outlook, our liquidity, our view of the M&A market, and a consistent operating environment, We expect to be more aggressive on buybacks in 2022, and Chris will provide more color on that shortly. Number three, in business development, the December quarter is the seasonally weakest for our industry. Still, we achieved net bookings of $3.2 billion in the quarter, representing a book-to-bill ratio of 0.9%. Importantly, about half of the awards were for new work. For the year, we booked $15.5 billion of awards for a book-to-bill ratio of 1.1. Our bookings don't include anything for the roughly $4 billion of protested awards we've been tracking, although earlier this month we received positive developments on two of them. The FAA re-awarded us our incumbent work modernizing the National Airspace System, and GAO denied the protest of our takeaway of the NASA Network and Communications Program, known as AGES. We're still awaiting word on whether either firm continues to object. Total backlog at the end of the quarter stood at $34.5 billion. which doesn't include any future task orders for many of our large single award IDIQs like NGIN. With total backlog almost two and a half times our 2022 revenue, we have a strong foundation for growth. In the fourth quarter, we had large awards in each sector, including ISR support for the Air Combat Command in Defense, operational support to a publicly traded utility, and R&D support to the National Energy Technology Laboratory in civil, and IT support to the Federal Parent Locator Service in health. I want to focus on another award that speaks to what makes Dynetics so attractive to us. Our Dynetics subsidiary was awarded a six-year $479 million cost plus fixed fee contract to develop hypersonic thermal protection system prototypes for the U.S. Army's Rapid Capabilities and Critical Technologies Office. Under the contract, Dynetics will also support materials research, novel inspection, and acceptance efforts. The thermal protection system shields elements of the long-range hypersonic weapon system and the Navy conventional prompt strike system from extreme environments seen during flight. The Army and Navy working jointly have made hypersonic weapons their top priority, and this program is just one of the ways that we're supporting the broader hypersonic program. We're also the prime contractor for the common hypersonic glide body weapon and a key subcontractor for the long range hypersonic weapon system. These programs are well funded and Dynetics is right at the center of them. Number four, our ability to recruit, retain, motivate, and grow our people is critical to our success. We were relatively flat from a headcount standpoint in the quarter, but we're up 11% for the year. As tough as this year has been for our customers and the market, it's been just as tough for our people. I would like to take a moment to thank the 43,000 Leidos employees for their unwavering commitment and collaboration in light of COVID challenges. We asked a lot of them and they truly delivered. Whether executing a complex NGEN transition three months ahead of plan or successfully delivering the MHS Genesis electronic health record system to an additional 10,000 clinicians and providers as part of its largest wave deployment to date, our teams have put mission first and delivery for our customers. One of the ways that we support our people is through a company culture that fosters a sense of belonging, welcomes all perspectives and contributions, and provides equitable access to opportunities and resources for everyone. Inclusion and integrity are intrinsically linked by the responsibility to respect yourselves and others. Our employees are empowered to uphold our values, creating a culture that we are incredibly proud of, and that makes Leidos unique. We're committed to continued transparency in how we're doing from a diversity standpoint, as well as making the lives of our employees and their communities better. For the first time, we'll publish our consolidated EE01 report on our website which includes detailed information regarding workforce diversity so we can chart our progress on the journey. Before turning it over to Chris, I'd like to address the current budget environment. Since the Q3 call, Congress passed the fiscal year 2022 National Defense Authorization Act, and President Biden signed the bill into law. The NDAA legislation authorizes approximately $740 billion for defense programs, a $25 billion increase to last year, and well above the original presidential request. Bipartisan leadership of the House and Senate Appropriations Panels reached an agreement on February 9th on the physical year 2022 top line spending numbers for defense and non-defense programs. Spending levels won't be publicly announced until after the Senate passes another CR. However, it appears there will be an increase for defense accounts and a slightly larger increase for non-defense accounts. Ultimately, 12 appropriation bills will be packaged into a single omnibus bill for floor consideration. We are hopeful that the omnibus will be brought to the floor by March 8th so the President can approve it, so it can be approved by the Senate and then signed by the President before the March 11th CR deadline. With that, I'll now turn the call over to Chris Cage for more details on our results in our 2022 outlook.